Negative Effects of Money Laundering on The Economy

What Are The Negative Effects of Money Laundering on The Economy?

Money laundering damages financial sector institutions that are critical for economic growth, promoting crime and corruption that slow economic growth, reducing efficiency in the real sector of the economy. The majority of global research focuses on two major money-laundering sectors: drug trafficking and terrorist organizations. The effect of successfully clearing drug money is obvious: more drugs, more crime, more violence. The link between money laundering and terrorism can be a bit more complicated, for an obvious example, terrorists are knocking down money so that the authorities cannot monitor them and prevent their planned attacks.

Money laundering is a problem not only in the world’s major financial markets and sea centers but also in emerging markets. As emerging markets open up their economies and financial sectors, they are becoming increasingly appropriate targets for money laundering activities. Money laundering creates unpredictable changes in money demand, as well as causing large fluctuations in international capital flows and exchange rates.

The Decrease in Government Revenues

Money laundering is a global phenomenon that undermines the economic and political stability of States. As it becomes difficult for the government to generate income from the related transactions, which are frequent in the informal economy, it decreases tax revenues, which causes a serious negative impact on the economy.

Socioeconomic Costs

The socioeconomic effects of money laundering are diverse because dirty money from criminal activities flows into legitimate funds; they are used to expand existing crime transactions and finance new ones. Also, money laundering can lead to the transfer of economic power from the market, the government, and citizens to criminals, thereby eliminating crimes and corruption.

What to Do to Reduce The Negative Effects of Money Laundering?

Emerging economies may find it difficult to break the cycle of corruption even though they have less anti-money laundering (AML) regulations. Criminals are more likely to target weaker systems. This means losing a lot of money for laundering, but the government lacks funds to prevent this. As a result, developing countries need to receive assistance from international and regional organizations to secure their economic systems. Money laundering and terrorist financing have weakened and failed many financial institutions due to non-compliance with money laundering and counter-terrorism financing programs. Some banks had to be closed after the loss of regulations resulting from AML / CFT compliance violations. Financial institutions are the backbone of the economy, but the problem begins when channels for money laundering are created.

The United States, the European Union, and UNO have configured frameworks to protect the world financial system from money laundering and terrorist financing actions. Targeted and comprehensive sanctions are applied to persons, legal entities, and jurisdictions that violate AML / CFT regulations, facing serious economic difficulties. The US Foreign Assets Control Office (OFAC) and the Financial Action Task Force (FATF) are important organizations for this purpose. As a result, financial institutions, in particular, do not have difficulty breaking the money laundering chain when they have regulations such as AML / CTF.